People of the State of California, ex rel. et al v. Federal Housing Finance Agency et al
Filing
194
ORDER by Judge Claudia Wilken GRANTING PLAINTIFFS 158 in case 4:10-cv-03084-CW) MOTION FOR SUMMARY JUDGMENT, AND DENYING DEFENDANTS 168 CROSS-MOTION FOR SUMMARY JUDGMENT. (Attachments: # 1 Certificate/Proof of Service) (ndr, COURT STAFF) (Filed on 8/9/2012)
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IN THE UNITED STATES DISTRICT COURT
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FOR THE NORTHERN DISTRICT OF CALIFORNIA
United States District Court
For the Northern District of California
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PEOPLE OF THE STATE OF
CALIFORNIA, ex rel. KAMALA D.
HARRIS, ATTORNEY GENERAL,
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v.
C
C
C
C
10-03084
10-03270
10-03317
10-04482
CW
CW
CW
CW
Plaintiff,
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No.
No.
No.
No.
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FEDERAL HOUSING FINANCE AGENCY;
EDWARD DeMARCO, in his capacity
as Acting Director of FEDERAL
HOUSING FINANCE AGENCY; FEDERAL
HOME LOAN MORTGAGE CORPORATION;
CHARLES E. HALDEMAN, Jr., in his
capacity as Chief Executive
Officer of FEDERAL HOME LOAN
MORTGAGE CORPORATION; FEDERAL
NATIONAL MORTGAGE ASSOCIATION;
and MICHAEL J. WILLIAMS, in his
capacity as Chief Executive
Officer of FEDERAL NATIONAL
MORTGAGE ASSOCIATION,
Defendants.
________________________________/
ORDER GRANTING
PLAINTIFFS’ MOTION
FOR SUMMARY
JUDGMENT, Docket
No. 158, AND
DENYING
DEFENDANTS’ CROSSMOTION FOR SUMMARY
JUDGMENT, Docket
No. 168.
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SONOMA COUNTY and PLACER COUNTY,
Plaintiff and
Plaintiff-Intervener,
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United States District Court
For the Northern District of California
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v.
FEDERAL HOUSING FINANCE AGENCY;
EDWARD DeMARCO, in his capacity
as Acting Director of FEDERAL
HOUSING FINANCE AGENCY; FEDERAL
HOME LOAN MORTGAGE CORPORATION;
CHARLES E. HALDEMAN, Jr., in his
capacity as Chief Executive
Officer of FEDERAL HOME LOAN
MORTGAGE CORPORATION; FEDERAL
NATIONAL MORTGAGE ASSOCIATION;
and MICHAEL J. WILLIAMS, in his
capacity as Chief Executive
Officer of FEDERAL NATIONAL
MORTGAGE ASSOCIATION,
Defendants.
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/
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SIERRA CLUB,
Plaintiff,
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v.
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FEDERAL HOUSING FINANCE AGENCY;
and EDWARD DeMARCO, in his
capacity as Acting Director of
FEDERAL HOUSING FINANCE AGENCY,
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Defendants.
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/
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CITY OF PALM DESERT,
Plaintiff,
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v.
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FEDERAL HOUSING FINANCE AGENCY;
FEDERAL NATIONAL MORTGAGE
ASSOCIATION; and FEDERAL HOME
LOAN MORTGAGE CORPORATION,
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Defendants.
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/
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California, Sonoma and Placer Counties, the City of Palm
2
Desert and the Sierra Club have sued the Federal Housing Finance
3
Agency (FHFA), its director, the Federal National Housing
4
Association (Fannie Mae) and the Federal Loan Mortgage Corporation
5
(Freddie Mac).1
The lawsuits challenge actions by the FHFA,
6
Fannie Mae and Freddie Mac which have thwarted certain federally
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funded, state and locally administered initiatives known as
Property Assessed Clean Energy (PACE) programs.2
Through PACE
United States District Court
For the Northern District of California
10
programs, state and local governments finance energy conservation
11
property improvements with debt obligations secured by the
12
retrofitted properties.
13
The programs are intended to foster the
use of renewable energy, energy and water efficiency, and the
14
creation of jobs.
Congress has allocated substantial federal
15
16
funding to support the expansion of PACE programs nation-wide, and
17
the executive branch of the federal government has engaged in
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extensive inter-agency coordination efforts to advance the
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implementation of PACE programs.
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1
The claims against Defendants Charles E. Halderman, Jr. and
Michael J. Williams, who were sued in their official capacities as
Chief Executive Officers for Fannie Mae and Freddie Mac, were
previously dismissed. No. C 10-03084, Docket No. 83; No. C 1003270, Docket No. 93.
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Three similar cases have been filed in federal district
courts in Florida and New York: The Town of Babylon v. Federal
Housing Finance Agency, et al., 2:10-cv-04916 (E.D.N.Y); Natural
Resource Defense Council, Inc. v. Federal Housing Finance
Authority, et al., 1:10-cv-07647-SAS (S.D.N.Y.); and Leon County
v. Federal Housing Finance Agency, et al., 4:10-cv-00436-RH (N.D.
Fla.). All three actions have been dismissed, and appeals are
pending.
3
1
Plaintiffs allege that Defendants have violated the
2
Administrative Procedures Act (APA) and the National Environmental
3
Policy Act (NEPA).3
4
obligations created by PACE programs, and the extent to which the
5
The parties dispute the nature of the debt
obligations create risks for secondary mortgage holders, such as
6
Fannie Mae and Freddie Mac, collectively referred to as the
7
8
9
Enterprises.
The FHFA has taken the position that PACE programs
that result in lien obligations which take priority over mortgage
United States District Court
For the Northern District of California
10
loans complicate and make more expensive alienation of the
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encumbered properties and, thus, pose risk to the security
12
interests of entities that purchase the mortgages for investment
13
purposes.
14
Plaintiffs claim that (1) Defendants disregarded
statutorily imposed procedural requirements in adopting rules
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about the PACE debt obligations; (2) Defendants' rules were
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substantively unlawful because they were arbitrary and capricious;
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and (3) the rule-making process failed to comply with
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environmental laws.
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Plaintiffs have jointly moved for summary judgment on all
21
claims.
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summary judgment.
Defendants have opposed the motion and cross-moved for
Having considered all of the parties’
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submissions and oral argument, the Court grants Plaintiffs’ motion
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for summary judgment that Defendants failed to comply with the
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3
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The Court previously dismissed Plaintiffs’ claims under
various state laws and the Constitution's Tenth Amendment and
Spending Clause.
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APA’s notice and comment requirement and denies Defendants’ cross-
2
motion for summary judgment.
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BACKGROUND
In 2008, California approved legislation to allow cities and
counties to create PACE programs, through which property owners
may enter into contracts for assessments to finance the
7
installation of energy efficiency or renewable energy improvements
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9
that are permanently fixed to residential (including multi-
United States District Court
For the Northern District of California
10
family), commercial, industrial, or other real property.4
11
Ch. 159, Stats. 2008.
12
property owners repay the assessments with their property taxes,
13
and the liens associated with the assessments are given priority
14
AB 811,
In many, but not all, PACE programs,
over previously-recorded private liens, such as mortgages.
15
Also in 2008, Congress enacted the Housing and Economic
16
17
Recovery Act of 2008 (HERA), Public Law 110-289, 122 Stat. 2654.
18
Through this law, Congress established the FHFA to regulate and
19
oversee the Enterprises, as well as the Federal Home Loan Banks
20
(FHL Banks), which together largely control the country's
21
secondary market for residential mortgages.
22
Federal Housing Enterprises Financial Safety and Soundness Act of
The HERA amended the
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1992, 12 U.S.C. § 4501 et seq. (Safety and Soundness Act).
That
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Act outlines the regulatory and oversight structure for the
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In 2009, the state legislature expanded the law,
authorizing PACE financing for water efficiency improvements.
AB 474, Ch. 444, Stats. 2009.
5
1
Enterprises and the FHL Banks.
2
by the HERA, the Safety and Soundness Act vests in the FHFA the
3
authority to act as a conservator and receiver for the Enterprises
4
and the FHL Banks, together referred to as the regulated entities.
5
12 U.S.C. §§ 4511(b); 4617(a).
6
12 U.S.C. § 4502(20).
As amended
The Safety and Soundness Act also establishes a tiered system
7
of classification of the capitalization of the regulated entities.
8
9
As of June 30, 2008, James B. Lockhart III, then director of the
United States District Court
For the Northern District of California
10
FHFA, classified the Enterprises as undercapitalized, pursuant to
11
his discretionary authority under the statute.
12
Request for Judicial Notice, Ex. 6 at 2.
13
Lockhart placed the Enterprises in FHFA conservatorship.
14
Pls.’ Second
On September 7, 2008,
Id.
On February 17, 2009, Congress approved the American Recovery
15
and Reinvestment Act of 2009 (Recovery Act), Public Law 111-5, 123
16
Stat. 115, which, among other things, allocated eighty billion
17
18
dollars to projects related to energy and the environment.
19
Plaintiffs’ Excerpts of Administrative Record (Plaintiffs’
20
Excerpts), Docket No. 182, Exhibit B, White House Middle Class
21
Task Force and White House Council on Environmental Quality,
22
“Recovery Through Retrofit” Report, October 2009 (Retrofit
23
Report), at 2.
The Act provided state and local governments with
24
an “unprecedented opportunity to expand investments in energy
25
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retrofits and develop community-based programs on a large scale.”
Id.
28
6
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The California Energy Commission was charged with
2
administering and distributing the Recovery Act funds allocated to
3
the state.
4
Commission from February 2009 to February 2011, the federal
5
Department of Energy (DOE) allocated $49.6 million in Recovery Act
6
According to Karen Douglas, the Chair of the
funds for an Energy Efficiency and Conservation Block Grant
7
Program.
PACE programs, among other projects, were eligible for
8
9
United States District Court
For the Northern District of California
10
block grant funding.
The DOE also allocated to the Energy Commission $226 million
11
in Recovery Act funds for the State Energy Program (SEP).
The DOE
12
encouraged states to develop energy strategies that align with the
13
national goals of increasing jobs, reducing the United States’ oil
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dependence through increases in energy efficiency and the
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deployment of renewable energy technologies, promoting economic
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vitality through an increase in “green jobs,” and reducing
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greenhouse gas emissions.
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Commission awarded thirty million dollars in SEP funding to five
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municipal PACE programs.
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expected to leverage $370 million, create 4,353 jobs, save over
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336 million kilowatt-hours of energy, and avoid emissions of
23
On February 10, 2010, the Energy
The awards for these PACE programs were
187,264 tons of greenhouse gases over the contract period.
24
Douglas Dec. at ¶ 12.
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26
High level federal and state officials participated in
27
efforts to advance the PACE program nation-wide.
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2009, the White House Council on Environmental Quality (CEQ) and
7
Beginning in May
1
the Office of the Vice President facilitated an interagency
2
process, involving eleven departments and agencies and six White
3
House Offices,5 to develop recommendations for federal action to
4
increase green job opportunities and boost energy savings by
5
retrofitting homes for energy efficiency.
Retrofit Report at 5.
6
In a letter dated June 18, 2009, Director Lockhart advised
7
8
9
banking and creditor trade groups, as well as associations for
mortgage regulators, governors and state legislators, of “an
United States District Court
For the Northern District of California
10
emerging trend in state and local financing for residential energy
11
efficiency home improvements.”
12
that the programs “will help improve our use of resources and, in
13
the long term, keep down the costs of home ownership,” but that
14
He explained the FHFA’s belief
“such programs must be carefully crafted to avoid unintended
15
consequences for homeowners and lenders.”
Plaintiffs’ Excerpts,
16
17
18
Ex. A.
On October 12, 2009, then California Attorney General Edmund
19
G. Brown, Jr., contacted Lockhart regarding his June 18, 2009
20
letter.
The Attorney General emphasized that under California law
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5
The following departments and agencies participated: Office
of the Vice President, Department of Agriculture, Department of
Commerce, Department of Education, Department of Energy,
Department of Housing and Urban Development, Department of Labor,
Department of Treasury, Environmental Protection Agency, Equal
Employment Opportunity Commission, General Services Administration
and Small Business Administration, as well as Council of Economic
Advisers, Domestic Policy Council, National Economic Council,
Office of Management and Budget, Office of Public Engagement and
Intergovernmental Affairs and Office of Science and Technology
Policy from the Executive Office of the President.
8
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the debt obligations were properly treated as assessments, and
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asserted that “proper PACE program design” could overcome the
3
FHFA’s concerns.
4
5
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Plaintiffs’ Excerpts, Ex. C.
In October of that year, the White-House-led interagency
effort culminated in the release of a report entitled, “Recovery
Through Retrofit,” announcing a federal proposal to expand PACE
7
programs.
On October 18, 2009, the White House released its
8
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“Policy Framework for PACE Financing Programs.”
United States District Court
For the Northern District of California
10
20.
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Varma Dec., Ex.
and demonstration level PACE programs.
12
The framework provided guidance to federally supported pilot
With respect to homeowner protections, the framework
13
encouraged the voluntary adoption of three measures to ensure that
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PACE-financed energy retrofits would pay for themselves within a
15
reasonable time, and that homeowners would be protected against
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fraud or substandard work.
First, the framework called for
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“savings to investment ratios” for PACE program assessments to be
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greater than one; that is, the expected average monthly utility
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savings to homeowners should be greater than the expected monthly
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increase in tax assessments due to the PACE energy efficiency or
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renewable energy improvements.
23
Second, the framework recommended
that PACE financing be limited to investments that have a high
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return in terms of energy efficiency gains.
Third, the framework
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advised that PACE programs should ensure that the retrofits would
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be constructed as intended.
That is, the scope of the retrofit
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should be determined by a list of presumptively efficient projects
9
1
or should be based on an energy audit; licensed contractors or
2
installers should carry out the home improvements; and PACE
3
programs should institute a quality assurance protocol to verify
4
that the home improvements are completed and satisfy required
5
standards.
6
The framework also announced parameters to limit risks to
7
mortgage lenders.
These elements of the framework recommended a
8
9
reserve fund established at the local level to protect against
United States District Court
For the Northern District of California
10
late payments or non-payments of the assessment; a requirement
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that the length of time for a homeowner to repay the PACE
12
assessments should not exceed the life expectancy of the energy
13
efficient improvements; a general limitation on the amount of PACE
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financing to ten percent of the appraised value of the home;
15
assurances of clear title to the property, current property taxes
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and mortgage payments, and an absence of outstanding or
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unsatisfied tax liens, notices of default or other property-based
19
debt delinquencies; and an absence of existing mortgages or other
20
debt on the property in an amount that exceeds the value of the
21
property.
22
escrow payments for PACE assessments and precautions in
23
Finally, the framework called for the imposition of
establishing PACE programs in areas experiencing large declines in
24
home prices.
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26
On October 29, 2009, FHFA Acting Director Edward DeMarco
27
replied to the letter Attorney General Brown had sent to Lockhart.
28
Plaintiffs’ Excerpts, Ex. D.
DeMarco’s letter did not mention the
10
1
White House Retrofit Report or policy framework released earlier
2
that month, but stated that the FHFA was working with other
3
federal departments and agencies to identify and promote best
4
practices so as to align improved energy efficiency, consumer
5
protection, and prudent lending goals.
6
Id.
On February 16, 2010, the FHFA produced a document entitled,
7
“Market and Legal Issues Related to Energy Loan Tax Assessment
8
9
Programs (ELTAPs)/PACE (Property Assessed Clean Energy) Programs.”
United States District Court
For the Northern District of California
10
Varma Dec., Ex. 43.
In the document, the FHFA discussed a number
11
of deficiencies in PACE programs, including the absence of any
12
national model for appropriate lending standards for PACE and
13
ELTAP programs, the creation of unnecessary market disruptions by
14
first liens, the absence of retrofit standards, complications
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arising from the reliance of PACE programs on subsidies, such as
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tax credits and utility firm rebates, to generate energy savings,
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18
and, finally, the existence of alternatives to ELTAP, through
19
established leasing programs for residential solar energy systems.
20
The FHFA explained that the priority of PACE liens over mortgage
21
liens increased uncertainty and created difficulties in
22
determining the value of holdings impacted by PACE encumbrances.
23
Id. at 3.
24
The FHFA described the following scenario to explain that, in
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26
a property sale triggered by an unpaid assessment, the mortgage
27
lender becomes the guarantor of the PACE assessment.
28
In the event of the sale of a homeowner's property for a
11
Id. at 5.
1
delinquent PACE lien, other liens, including the first mortgage,
2
are eliminated.
3
payment of property tax assessments, the mortgage lender would
4
receive notice and would have to pay the arrearage to prevent a
5
tax sale and avoid losing its lien on the security property.
6
When a homeowner becomes delinquent on the
The
lender would have to pay the PACE lien assessment for the same
7
reason.
If the mortgage lender was not in control of the sale of
8
9
the property, the lender could lose its entire monetary interest
United States District Court
For the Northern District of California
10
in the property; there would be no incentive in a tax sale to
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garner more than the amount of the tax arrearage.
12
amount of the tax arrearages would be uncertain.
Further, the
13
In addition, subsequent purchasers of a PACE-encumbered
14
property could discount their purchase offers to account for the
15
total assessments owed, affecting the lender’s ability to recoup
16
the property value.
17
18
The FHFA noted that some municipalities required priority
19
liens for PACE and ELTAP loans.
20
eighteen states that have authorized programs should engage with
21
the federal government in pilot programs that test various models
22
(including those without first liens and those that employ greater
23
Id. at 3.
The FHFA stated, “The
private sector administration both of lending and energy
24
retrofitting).”
Id. at 8.
However, Defendants acknowledge that
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26
Barclays Capital has explained to PACE advocates that bonds backed
27
by PACE liens without first-lien priority likely would be rated
28
"as non-investment grade and therefore will have limited buyer
12
1
appeal while also demanding high interest rates."
2
22.
3
Varma Dec., Ex.
On March 5, 2010, Freddie Mac sent a confidential letter to
4
the FHFA, highlighting the growing number of states approving
5
legislation to enable the establishment of PACE programs,
6
generally relying on a priority lien to secure the improvements.6
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Freddie Mac reiterated its concerns about such programs.
Dec., Ex. 26.
Varma
The letter, copies of which were sent to DeMarco,
United States District Court
For the Northern District of California
10
FHFA General Counsel Alfred Pollard and other agency executives,
11
discussed the first lien position of the assessments and explained
12
that the size of the loans could be substantial.
13
further explained that, because the liens could be placed after
14
Freddie Mac
the first mortgage lien was created, the mortgage holder may not
15
be aware that its lien has been subordinated until it or the local
16
17
entity initiates foreclosure.
In addition, Freddie Mac expressed
18
concern that the lack of required underwriting standards, along
19
with the failure to set loan-to-value limits, was likely to result
20
in many borrowers obtaining loans that they were unable to repay.
21
Freddie Mac stated that no uniform set of best practices
22
existed to mitigate the risks it faced as a result of the
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6
Freddie Mac noted that such laws had been approved in
California, Colorado, Florida, Hawaii, Illinois, Louisiana,
Maryland, Nevada, New Mexico, New York, North Carolina, Ohio,
Oklahoma, Oregon, Texas, Vermont, Virginia and Wisconsin, and
similar legislation had been introduced in Arkansas, Arizona,
Iowa, Maine, Michigan, Nebraska, New Hampshire, Rhode Island,
South Carolina, Washington and West Virginia.
13
1
programs, despite months of efforts it had undertaken, in
2
collaboration with the FHFA and other agencies, to develop such
3
standards.
4
take the following measures: (1) reinforce existing contractual
5
rights under the Freddie Mac Single-Family Seller/Servicer Guide
6
Accordingly, Freddie Mac requested FHFA approval to
and the Freddie Mac/Fannie Mae Uniform Security Instrument;
7
(2) establish new due diligence requirements for servicers; and
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9
(3) restrict Freddie-Mac-approved seller/servicers from financing
United States District Court
For the Northern District of California
10
energy loans that would subordinate existing Freddie Mac
11
mortgages.
12
given the proliferation of PACE programs, and were consistent with
13
the FHFA’s goal as conservator to maintain Freddie Mac's assets
14
and minimize its losses during conservatorship.
Freddie Mac stated that the measures were warranted
15
On May 5, 2010, Fannie Mae and Freddie Mac both issued
16
letters to their mortgage sellers and servicers, again addressing
17
18
19
concerns about PACE programs.
On May 7, 2010, the DOE issued “Guidelines for Pilot PACE
20
Financing Programs,” providing “best practices guidelines to
21
implement the Policy Framework for PACE Financing Programs
22
announced on October 18, 2009.”
23
Varma Dec., Ex. 41.
Plaintiffs’ Excerpts, Ex. H;
The best practices called for local
24
governments to consider the following requirements: (1) the
25
26
expected savings-to-investment ratio should be greater than one;
27
(2) the term of the assessment should not exceed the useful life
28
of the improvements; (3) the mortgage holder of record should
14
1
receive notice when PACE liens are placed; (4) PACE liens should
2
not accelerate upon property owner default; (5) the assessments
3
should not exceed ten percent of a property’s estimated value;
4
(6) quality assurance and anti-fraud measures should be
5
implemented, such as the use of validly licensed auditors and
6
contractors only; (7) rebates and tax credits should be considered
7
in determining the appropriate financing structure; (8) education
8
9
programs for PACE program participants should be carried out;
United States District Court
For the Northern District of California
10
(9) a debt service reserve fund should be established; and
11
(10) data should be collected.
12
practices for underwriting PACE assessments.
13
(1) verification of property ownership, specifically, clear title,
14
location of the property in a financing district, and other
The DOE also announced best
The DOE called for
15
restrictions; (2) proper evaluation of existing property-based
16
debt and the worth of the property; and (3) a determination of the
17
18
19
property owner’s ability to pay.
In a May 24, 2010 letter, the DOE sought clarification from
20
the FHFA regarding Fannie Mae and Freddie Mac's May 5, 2010 lender
21
letters.
22
guidelines and parameters that experimental pilot PACE financing
23
The DOE requested from the FHFA "as soon as practicable
programs should follow so that their operations can proceed
24
without encountering adverse action by the Government Sponsored
25
26
27
Entities (GSEs) under your conservatorship."
Excerpts, Ex. M.
Plaintiffs'
The DOE sought "specific criteria the financial
28
15
1
regulatory community believes is necessary to enable these
2
experimental pilot PACE financing programs to proceed."
3
Id.
On July 6, 2010, the FHFA issued a statement that the PACE
4
programs “present significant safety and soundness concerns that
5
must be addressed by Fannie Mae, Freddie Mac and the Federal Home
6
Loan Banks.”
The FHFA stated that first liens created by PACE
7
programs were different from “routine tax assessments,” and posed
8
9
significant risks to lenders, servicers, and mortgage securities
United States District Court
For the Northern District of California
10
investors.
The FHFA “urged state and local governments to
11
reconsider these programs” and called “for a pause in such
12
programs so concerns can be addressed.”
13
Mae, Freddie Mac and the FHL Banks to undertake “prudential
14
actions,” including reviewing their collateral policies to assure
The FHFA directed Fannie
15
no adverse impact by PACE programs.
Although Defendants take the
16
position that the FHFA issued this statement in its capacity as
17
18
19
20
21
22
23
24
25
26
27
28
16
1
conservator as well as that of regulator, the statement itself did
2
not say so, or cite any statutory or regulatory provision.7
3
4
5
On August 31, 2010, Fannie Mae and Freddie Mac, citing the
FHFA’s July 2010 statement, announced to lenders that they would
not purchase mortgages originated on or after July 6, 2010, which
6
were secured by properties encumbered by PACE obligations.
7
8
9
On February 28, 2011, after the hearing on Defendants’ motion
to dismiss the present actions but before the Court issued its
United States District Court
For the Northern District of California
10
order, the FHFA's General Counsel sent a letter to General Counsel
11
for Fannie Mae and Freddie Mac, reaffirming that debts arising
12
from PACE programs pose significant risks to the Enterprises.
13
14
15
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18
19
20
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26
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28
7
The
On August 16, 2010, the FHFA issued proposed guidance
regarding private transfer fee covenants. 75 Fed. Reg. 49932.
The proposed guidance would have advised the Enterprises not to
purchase or invest in any mortgages encumbered by private transfer
fee covenants or securities backed by such mortgages and
discouraged the FHL Banks from purchasing or investing in such
mortgages or securities or holding them as collateral for
advances. The FHFA did not adopt this guidance in final form.
After receiving several thousand comments on it, the FHFA decided
to address the issue through a regulation, rather than guidance.
76 Fed. Reg. 6702. On February 8, 2011, the FHFA proposed a
regulation narrower in scope than the proposed guidance. The
proposed regulation would have prohibited the regulated entities
from dealing in mortgages on properties encumbered by certain
types of private transfer fee covenants, rather than any such
covenant. The final rule, adopted March 16, 2012, prohibits
regulated entities from purchasing, investing or otherwise dealing
in any mortgages on properties encumbered by private transfer fee
covenants, securities backed by such mortgages, or securities
backed by the income stream from such covenants, except for
private transfer fee covenants that require payment of a fee to a
covered association, such as homeowner and condominium
associations, and that limit use of such transfer fees exclusively
to purposes which provide a direct benefit to the real property
encumbered by the private transfer fee covenant. 12 C.F.R.
§§ 1228.1 and 1228.2; 77 Fed. Reg. 15566-01.
17
1
FHFA invoked its statutory authority as conservator and directed
2
that the "Enterprises shall continue to refrain from purchasing
3
mortgage loans secured by properties with outstanding first-lien
4
PACE obligations."
5
"Enterprises shall continue to operate in accordance with the
6
In addition, the letter ordered that the
Lender Letters and shall undertake other steps necessary to
7
protect their safe and sound operations from these first-lien PACE
8
9
United States District Court
For the Northern District of California
10
programs."
FHFA General Counsel Pollard attested that the FHFA received
11
input from the Enterprises and PACE stakeholders, as well as
12
federal financial institution regulators, regarding the risks
13
posed by PACE programs.
14
the DOE best practices guidelines were an unsatisfactory response
According to Pollard, the FHFA found that
15
to its concerns because they did not proscribe the use of priority
16
liens, they continued to allow collateral-based lending, and there
17
18
was no enforcement mechanism to ensure that PACE programs
19
throughout the country complied with the DOE guidelines.
20
did not attest that the FHFA had considered alternatives to its
21
blanket prohibition against the purchase of PACE-encumbered
22
mortgages or that it had considered the impact on the public
23
Pollard
interest of blocking the PACE programs, other than minimizing
24
risks for the Enterprises.
Nor have Defendants presented evidence
25
26
27
that the FHFA weighed the costs associated with the risk exposure
produced by PACE programs against the economic benefits of
28
18
1
allowing PACE programs to continue to expand and build a market
2
for residential energy conservation projects.
3
LEGAL STANDARD
4
Summary judgment is properly granted when no genuine and
5
6
disputed issues of material fact remain, and when, viewing the
evidence most favorably to the non-moving party, the movant is
7
clearly entitled to prevail as a matter of law.
Fed. R. Civ. P.
8
9
56; Celotex Corp. v. Catrett, 477 U.S. 317, 322-23 (1986);
United States District Court
For the Northern District of California
10
Eisenberg v. Ins. Co. of N. Am., 815 F.2d 1285, 1288-89 (9th Cir.
11
1987).
12
The moving party bears the burden of showing that there is no
13
material factual dispute.
14
true the opposing party's evidence, if supported by affidavits or
Therefore, the court must regard as
15
other evidentiary material.
Celotex, 477 U.S. at 324; Eisenberg,
16
815 F.2d at 1289.
The court must draw all reasonable inferences
17
18
in favor of the party against whom summary judgment is sought.
19
Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S. 574,
20
587 (1986); Intel Corp. v. Hartford Accident & Indem. Co., 952
21
F.2d 1551, 1558 (9th Cir. 1991).
22
23
Material facts which would preclude entry of summary judgment
are those which, under applicable substantive law, may affect the
24
outcome of the case.
The substantive law will identify which
facts are material.
Anderson v. Liberty Lobby, Inc., 477 U.S.
25
26
27
242, 248 (1986).
28
19
DISCUSSION
1
2
3
I. Statutory Preclusion of Judicial Review
Defendants argue that they are entitled to summary judgment
4
because 12 U.S.C. §§ 4617(f) and 4623(d) preclude judicial review
5
of Plaintiffs' claims for relief.
6
The courts have long recognized a presumption in favor of
7
judicial review of administrative actions.
Love v. Thomas, 858
8
9
F.2d 1347, 1356 (9th Cir. 1988) (citing Block v. Community
United States District Court
For the Northern District of California
10
Nutrition Inst., 467 U.S. 340, 349-51 (1984)).
The presumption
11
may be overcome by various means, including "specific language or
12
specific legislative history that is a reliable indicator of
13
congressional intent," or "by inference of intent drawn from the
14
statutory scheme as a whole."
Block, 467 U.S. at 349.
Although
15
"great weight" is ordinarily given to an agency's interpretation
16
of a statute it is charged with enforcing, "that deference does
17
18
not extend to the question of judicial review, a matter within the
19
peculiar expertise of the courts."
Love, 858 F.2d at 1352 n.9.
20
A. Section 4617(f)
21
Section 4617(a) authorizes under certain circumstances the
22
23
discretionary or mandatory appointment of the FHFA as conservator
or receiver for a regulated entity.
12 U.S.C. § 4617(a).
As
24
conservator, the FHFA immediately succeeds to "all rights, titles,
25
26
powers, and privileges of the regulated entity, and of any
27
stockholder, officer, or director of such regulated entity" with
28
respect to the entity and its assets.
20
12 U.S.C. § 4617(b)(2)(A).
1
It may take over assets and operate the regulated entity; conduct
2
all business of the regulated entity; collect all obligations and
3
money due; perform all functions of the regulated entity in its
4
name which are consistent with the FHFA's appointment as
5
conservator or receiver; preserve and conserve the entity's assets
6
and property; and provide by contract for assistance in fulfilling
7
any function, activity, action, or duty as conservator or
8
9
receiver.
12 U.S.C. § 4617(b)(2)(B)(i)-(v).
In addition, the
United States District Court
For the Northern District of California
10
FHFA’s specifically enumerated powers as conservator authorize it
11
to take such action as may be “necessary to put the regulated
12
entity in a sound and solvent condition.” 12 U.S.C.
13
§ 4617(b)(2)(D)(i)-(ii).
14
Section 4617(f) limits judicial review of such actions,
15
stating that "no court may take any action to restrain or affect
16
the exercise of powers or functions of the Agency as a conservator
17
18
19
or a receiver."
12 U.S.C. § 4617(f).
Distinct from the FHFA's powers as a conservator or receiver,
20
it has supervisory and regulatory authority over the regulated
21
entities.
22
(B)(i)-(v).
23
See 12 U.S.C. §§ 4511(b); 4513b; 4513(a)(1)(A) and
It is clear from the statutory scheme overall and
other provisions of § 4617 that Congress distinguished between the
24
FHFA's powers as a conservator and its authority as a regulator,
25
26
and did not intend that the former would be limitless and subsume
27
the latter.
Although Congress intended to ensure the FHFA’s
28
ability to act freely as a conservator by preempting judicial
21
1
review under § 4617(f), as well as granting far-reaching powers,
2
the FHFA must show that it was acting as a conservator, rather
3
than a regulator.
4
actions is a matter of degree.
5
6
The appropriate characterization of the FHFA's
Defendants contend that the FHFA issued its July 2010
statement and February 2011 letter as conservator of the
7
Enterprises.
Defendants assert that the directives were a
8
9
business decision by the FHFA intended to minimize the
United States District Court
For the Northern District of California
10
Enterprises' credit loses while in conservatorship.
Plaintiffs
11
respond that the FHFA’s actions amount to substantive rule-making,
12
which can only be done in the FHFA's role as regulator, rather
13
than as conservator.
14
agrees with Plaintiffs.
For the reasons discussed below, the Court
15
The FHFA directed Fannie Mae, Freddie Mac and the FHL Banks
16
prospectively to refrain from purchasing a class of mortgage
17
18
loans, namely, those secured by property with an outstanding PACE
19
first lien.
20
rights or powers of the Enterprises, taking over their assets,
21
collecting money due or operating their businesses, in keeping
22
with the FHFA's conservatorship authority.
23
These directives did not involve succeeding to the
Specific provisions of § 4617 include the phrase, "The agency
24
may, as conservator . . .," in reference to the FHFA's authority
25
26
in that role, while other provisions addressing the FHFA's
27
regulatory powers do not contain analogous language.
28
U.S.C. § 4617(b)(1) and (2)(C) with § 4617(b)(2)(A), (B), (G),
22
Compare 12
1
(H), (I)(i)(I) and (J)8 and § 4617(b)(4).
2
Congress intended to enumerate the FHFA's powers and duties as a
3
conservator, while delegating other duties to the FHFA's
4
regulatory authority.
5
This supports that
In Morrison-Knudsen Co., Inc. v. CHG International, Inc., 811
6
F.2d 1209 (9th Cir. 1987), the Ninth Circuit declined to hold that
7
8
9
the Federal Savings and Loan Insurance Corporation's authority to
adjudicate creditor claims was in keeping with the ordinary
United States District Court
For the Northern District of California
10
functions of a receiver.
11
language in the relevant statute failed to enumerate, and the
12
statutory scheme did not support, a receivership power to
13
adjudicate creditor claims.
14
The Ninth Circuit found that the
Id. at 1218-20.
Similarly here, the
Safety and Soundness Act does not enumerate, and its statutory
15
scheme does not support, the FHFA’s authority as conservator to
16
17
18
19
establish broad, prospective rules regarding classes of mortgages
that are eligible for purchase by the regulated entities.
In other cases upon which Defendants rely, federal agencies
20
undertook the ordinary day-to-day functions of an entity acting as
21
conservator or receiver to wind up the affairs of the failed
22
financial institutions.
See e.g., Ward v. Resolution Trust Corp.,
23
996 F.2d 99, 104 (5th Cir. 1993) (finding that the district court
24
25
26
27
28
was without jurisdiction to enjoin the sale of certain real
8
Although § 4617(b)(2)(J) is a broad, catchall provision,
given the overall statutory scheme, it should not be read to
authorize the FHFA to do anything and everything, including
engaging in rule-making, as a conservator.
23
1
property because disposing of the assets of the failed bank was a
2
“routine ‘receivership’ function”); In re Landmark Land Co. of
3
Okla., Inc., 973 F.2d 283, 290 (4th Cir. 1992) (holding that the
4
Resolution Trust Corporation (RTC),9 as a conservator, had
5
authority, beyond the reach of the district court’s injunctive
6
power, to call a meeting of the shareholders to elect new
7
8
9
management).
Defendants also cite Barrows v. Resolution Trust Corporation,
United States District Court
For the Northern District of California
10
39 F.3d 1166 (1st Cir. 1994).10
11
§ 1821(j)11 barred a district court from ordering the RTC, the
12
appointed receiver, to make certain loans to which the plaintiff
13
claimed he was entitled.
There, the First Circuit held that
Id. at *3.
Barrows held that the RTC’s
14
directive blocking a failed financial institution from extending a
15
16
17
18
19
20
21
9
Through the Financial Institutions Reform, Recovery, and
Enforcement Act (FIRREA), Congress authorized the RTC “to take all
actions necessary to resolve the problems posed by a financial
institution in default.” Gross v. Bell Sav. Bank PaSA, 974 F.2d
403, 406 (1992) (citing H.R. Rep. No. 101-54). Defendants cite
Kuriakose v. Federal Home Loan Mortgage Corporation, 674 F. Supp.
2d 483, 493 (S.D.N.Y. 2009), for the proposition that the courts
applying § 4617(f), may turn to precedent relating to the nearly
identical anti-injunction statute under the FIRREA.
22
10
23
24
25
26
27
28
Barrows is an unpublished per curiam opinion referred to in
the Federal Reporter at 39 F.3d 1166, in a “Table of Decisions
Without Reported Opinions.”
11
The parties agree that the language in § 4617(f) is similar
to that in 12 U.S.C. § 1821(j), which limits judicial review of
actions taken by the Federal Deposition Insurance Corporation
(FDIC) in its capacity as a conservator or receiver. Sahni v.
American Diversified Partners, 83 F.3d 1054, 1058-59 (9th Cir.
1996).
24
1
loan was an action of a conservator to preserve and conserve the
2
assets and property of the failed institution.
3
Defendants contend that, under Barrows, the FHFA's action
4
with respect to the PACE programs was akin to a business decision
5
preventing the institution from making a particular investment, as
6
necessary to conserve and preserve the assets of the Enterprises
7
while in conservatorship.
The directives that the FHFA issued to
8
9
the Enterprises and the FHL Banks differ from the receiver’s
United States District Court
For the Northern District of California
10
decision in Barrows because the former broadly and prospectively
11
prohibited all three of the regulated entities from the purchase
12
of an entire class of mortgages, while the latter involved a
13
receiver’s decision not to make a particular loan.
14
not establish that the FHFA was acting as a conservator here.
Barrows does
15
The FHFA’s directives here resemble an FHFA rule regarding
16
private transfer fee covenants.
A property owner or another
17
18
private party may attach private fee covenants to real property,
19
providing for payment of a transfer fee to an identified third
20
party upon each resale of the property.
21
02, *6703.
22
percentage of the property’s sales price and often exists for a
23
Id.
76 Fed. Reg. 6702-
The fee typically is stated as a fixed amount or as a
period of ninety-nine years.
Id.
As described above, the FHFA
24
initially sought public comment on proposed guidance to the
25
26
Enterprises and the FHL Banks that they should not purchase or
27
invest in mortgages on properties encumbered by private transfer
28
fee covenants.
75 Fed. Reg. 49932-01 at *49932.
25
After receiving
1
extensive comments regarding the proposed guidance, the FHFA
2
decided to address the subject by regulation rather than through
3
guidance and filed a notice of proposed rule-making.
4
6702-02, *6703.
5
proposed rule-making, the FHFA pointed out the risk that private
6
76 Fed. Reg.
Among other concerns raised in its notice of
transfer fees may not benefit homeowners or may not be disclosed
7
adequately, thus impeding the transferability, marketability and
8
9
United States District Court
For the Northern District of California
10
valuation of the encumbered properties.
Id. at *6703-04.
The FHFA then proposed a narrower regulation, received
11
further comment, and adopted, on March 16, 2012, a final rule
12
prohibiting the regulated entities, except in certain
13
circumstances, from purchasing, investing or otherwise dealing in
14
any mortgages on properties encumbered by private transfer fee
15
covenants, securities backed by such mortgages, or securities
16
backed by the income stream from such covenants, and barring the
17
18
FHL Banks from accepting such mortgages or securities as
19
collateral.
20
2012).
21
22
23
12 C.F.R. § 1228; 77 Fed. Reg. 15566-01 (March 16,
Because private transfer fee covenants and PACE first liens
are analogous, the fact that the FHFA followed notice and comment
rule-making procedures when regulating the former makes it
24
reasonable to infer that it was acting as a regulator when it
25
26
27
28
issued its directives about the latter.
Furthermore, the FHFA’s directives applied to the FHL Banks,
as well the Enterprises.
The fact that they bound all three
26
1
regulated entities, rather than just the entities in
2
conservatorship, supports the conclusion that the FHFA was acting
3
as a regulator, rather than a conservator.
4
5
6
The FHFA's February 2011 letter, asserting that it was acting
as a conservator, was created during the pendency of this
litigation and was addressed to general counsel for the
7
Enterprises.
The letter is a post-hoc effort by the FHFA to
8
9
United States District Court
For the Northern District of California
10
characterize its July 6, 2010 statement.
Contrary to Defendants’ argument, National Trust for Historic
11
Preservation v. FDIC, 21 F.3d 469 (D.C. Cir. 1994), does not
12
establish that the FHFA has discretion to decide whether it acts
13
in its capacity as conservator or as regulator.
14
Circuit held that the FDIC had discretion to determine whether it
There, the D.C.
15
acted in its capacity as a receiver or its capacity as a corporate
16
insurer.
Id. at 471.
It does not follow that Congress intended
17
18
the FHFA to have similar discretion because the scope of the
19
FHFA’s powers as regulator is different from, and substantially
20
greater than, the FDIC’s authority as a corporate insurer.
21
Furthermore, even if the FHFA had discretion to act as a
22
conservator or regulator with respect to a given issue, the FHFA
23
may not decide arbitrarily to act in different capacities for two
24
decisions that are substantially similar.
25
26
Given the presumption in favor of judicial review, to invoke
27
§ 4617(f), Defendants bear the burden to establish that the FHFA
28
was acting as conservator, to restore or protect the solvency of
27
1
the Enterprises.
Defendants have not carried this burden.
2
Section 4617 does not preclude judicial review here.
3
B. Section 4623(d)
4
Defendants also argue that their actions in connection with
5
the PACE programs are exempt from judicial review pursuant to 12
6
U.S.C. § 4623(d).
This provision restricts judicial review of any
7
action taken under § 4616(b)(4).
Section 4616(b)(1) through (4)
8
9
describes supervisory actions that the FHFA Director may take with
United States District Court
For the Northern District of California
10
respect to "significantly undercapitalized" regulated entities.
11
Section 4616(b)(4) authorizes the Director to require a
12
"significantly undercapitalized" regulated entity "to terminate,
13
reduce, or modify any activity that the Director determines
14
creates excessive risk to the regulated entity."
As noted
15
earlier, the Safety and Soundness Act establishes a tiered system
16
of classification of the capitalization of the regulated entities;
17
18
"significantly undercapitalized" is the second lowest of the four
19
tiers.
20
See 12 U.S.C. § 4614(a) and (b)(1)(C).
Defendants have not produced evidence that prior to, or even
21
contemporaneously with, the July 2010 statement or the February
22
2011 letter, the Enterprises were categorized as significantly
23
undercapitalized within the meaning of § 4614.
Nothing in the
24
July 2010 statement refers to § 4616(b)(4), or makes reference to
25
26
undercapitalization.
27
Furthermore, on October 9, 2008, the FHFA had issued a press
28
release announcing that the FHFA Director “had determined that it
28
1
[was] prudent and in the best interests of the market to suspend
2
capital classifications of Fannie Mae and Freddie Mac during the
3
conservatorship, in light of the United States Treasury’s Senior
4
Preferred Stock Purchase Agreement.”
5
Judicial Notice, Ex. 6 at 2.
6
Pls.’ Second Request for
The FHFA explained, “The Director
has the authority to make a discretionary downgrade of the capital
7
adequacy classification should certain safety and soundness
8
9
conditions arise that could impact future capital adequacy.
This
United States District Court
For the Northern District of California
10
classification requirement serves no purpose once an Enterprise
11
has been placed into conservatorship.”
12
Id. at 2-3.
Neither Defendants’ interrogatory responses nor Pollard’s
13
declaration establishes that, at the time of the FHFA’s
14
directives, the Enterprises had been categorized as significantly
15
undercapitalized based on their “negative core capital,” “negative
16
total equity” or their positions below the “Requirement Minimum
17
18
Capital.”
19
looking back at the financial metrics, the FHFA believes that the
20
Enterprises at the relevant time met the statutory definition of
21
“significantly undercapitalized.”
22
23
The responses and the declaration only show that,
Thus, the FHFA has not presented evidence that it acted
pursuant to its conservatorship powers authorized under
24
§ 4616(b)(4).
Section 4623(d) does not limit the Court's
25
26
jurisdiction to hear Plaintiffs' claims.
27
28
29
1
In sum, neither § 4617(f) nor § 4623(d) of Title 12 of the
2
United States Code bars judicial review of Defendants’ directive
3
on PACE financing.
4
II. Administrative Procedures Act
5
6
Plaintiffs allege that Defendants’ rule on PACE obligations
failed to comply with the notice and comment requirements of, and
7
was arbitrary and capricious in violation of, the APA, 5 U.S.C.
8
9
§§ 553, 706(2)(D).
United States District Court
For the Northern District of California
10
A. Requirements for judicial review under the APA
11
To invoke judicial review of agency action under the APA,
12
Plaintiffs must demonstrate prudential standing.
13
standing is a "purely statutory inquiry," rather than a
14
constitutional test, and determines "whether a particular
Prudential
15
plaintiff has been granted a right to sue by the statute under
16
which he or she brings suit."
City of Sausalito v. O'Neil, 386
17
18
F.3d 1186, 1199 (9th Cir. 2004).
19
prudential standing under the APA, 'the interest sought to be
20
protected by the complainant [must be] arguably within the zone of
21
interests to be protected or regulated by the statute . . . in
22
question.'"
23
"For a plaintiff to have
Nat'l Credit Union Admin. v. First National Bank &
Trust Co., 522 U.S. 479, 488 (1998) (alteration in original).
The
24
test requires that "we first discern the interest 'arguably . . .
25
26
to be protected' by the statutory provision at issue; we then
27
inquire whether the plaintiff's interests affected by the agency
28
action in question are among them."
30
Id. at 492.
A plaintiff is
1
outside a provision's zone of interest where "the plaintiff's
2
interests are so marginally related to or inconsistent with the
3
purposes implicit in the statute that it cannot reasonably be
4
assumed that Congress intended to permit the suit."
5
Securities Industry Ass’n, 479 U.S. 388, 399 (1987).
6
Clarke v.
The governmental Plaintiffs satisfy the requirements for
7
prudential standing.
The parties agree that the paramount goal of
8
9
the Safety and Soundness Act is to protect the stability and
United States District Court
For the Northern District of California
10
ongoing operation of the residential mortgage market, and the
11
interests of the state and municipalities depend on its stability.
12
California and its municipalities have created a system of state
13
and local laws and assessments, and they establish budgets that
14
hinge on a functional real estate market.
A healthy mortgage
15
market is a foundational element of the real estate market.
16
Although Congress has not expressed a specific purpose to benefit
17
18
state and local governments through the Safety and Soundness Act,
19
the governmental Plaintiffs share an interest in a safe and
20
sustainable secondary mortgage market and suffer as a result of a
21
faltering mortgage market.
22
have improperly sued under a theory of parens patriae is not
23
Defendants’ contention that Plaintiffs
persuasive because the governmental Plaintiffs are representing
24
their own state and municipal interests, not the interests of
25
26
27
particular residents.
The governmental Plaintiffs are within the
zone of interests of the Safety and Soundness Act.
28
31
1
Under the APA, judicial review is only permissible for final
2
agency action.
3
FHFA’s actions amounted to informal, non-final guidance.
4
agency action to be final, the action must (1) 'mark the
5
consummation of the agency's decisionmaking process' and (2) 'be
6
5 U.S.C. § 704.
Defendants contend that the
"For an
one by which rights or obligations have been determined, or from
7
which legal consequences will flow.'"
Ore. Natural Desert Ass'n
8
9
v. U.S. Forest Serv., 465 F.3d 977 (9th Cir. 2006).
To determine
United States District Court
For the Northern District of California
10
whether the consummation prong of the test has been satisfied, the
11
court must make a pragmatic consideration of the effect of the
12
action, not its label.
13
is satisfied when an agency action imposes an obligation, denies a
14
right, or fixes some legal relationship as a consummation of the
Id. at 982, 985.
The finality requirement
15
administrative process.
Id. at 986-87.
"An agency action may be
16
final if it has a 'direct and immediate . . . effect on the day17
18
to-day business' of the subject party."
19
original).
20
Id. at 987 (alteration in
In its July 2010 statement, the FHFA adopted the view that
21
PACE programs that establish first liens are inconsistent with
22
requirements contained in Fannie Mae’s and Freddie Mac’s Uniform
23
Security Instruments.
FAC, Ex. A, at 10.
The FHFA announced that
24
mortgages with such encumbrances were not suitable for purchase by
25
26
the regulated entities.
Its statement affirmed that the prior
27
lender letters issued by Fannie Mae and Freddie Mac, alerting
28
sellers and servicers that first liens run contrary to their
32
1
Uniform Security Instruments, would “remain in effect.”
2
arrived at this conclusion after “careful review” and “over a year
3
of working with federal and state government agencies.”
4
the FHFA expressly conveyed its intent to “pause” PACE programs
5
that include first liens.
6
See id.
The FHFA
Indeed,
The statement had a legal
effect because it immediately imposed on the regulated entities
7
obligations to take certain actions and it could reasonably be
8
9
read to provide a basis for an enforcement action should the
United States District Court
For the Northern District of California
10
entities have chosen to continue purchasing mortgages encumbered
11
by PACE liens.
12
Director to take enforcement action against regulated entities to
13
police their lawful operation.
14
The FHFA’s July 2010 statement constituted a final action.
The Safety and Soundness Act authorizes the FHFA
See e.g., 12 U.S.C. § 4631(a)(1).
15
B. Notice and comment requirement
16
Any regulations issued by the FHFA Director pursuant to the
17
18
agency’s general regulatory authority shall comply with the APA’s
19
requirements for notice and comment.
20
"Interpretative rules" are exempt from the notice and comment
21
requirements.
22
exemption is narrowly construed.
23
12 U.S.C. § 4526(b).
5 U.S.C. § 553(b)(3)(A).
The interpretive rule
Flagstaff Medical Center, Inc.
v. Sullivan, 962 F.2d 879, 885 (9th Cir. 1992).
A court need not
accept an agency's characterization of its rule.
Hemp Industries
24
25
26
Ass'n v. DEA, 333 F.3d 1082, 1087 (9th Cir. 2003).
"There is no
27
bright-line distinction between interpretative and substantive
28
rules."
Flagstaff, 962 F.2d at 886.
33
An interpretive rule is one "'issued by an agency to advise
1
2
the public of the agency's construction of the statutes and rules
3
which it administers.'"
4
(9th Cir. 2004) (citing Shalala v. Guernsey Mem'l Hosp., 514 U.S.
5
87, 88 (1995)).
6
Erringer v. Thompson, 371 F.3d 625, 630
"Because they generally clarify the application
of a law in a specific situation, they are used more for
7
discretionary fine-tuning than for general law making."
8
9
Flagstaff, 962 F.2d at 886.
"If the rule cannot fairly be seen as interpreting a statute
United States District Court
For the Northern District of California
10
11
or a regulation," and if it is enforced, it is not an interpretive
12
rule.
13
(9th Cir. 2010).
14
the rule must derive a proposition from an existing document whose
Catholic Health Initiatives v. Sebelius, 617 F.3d 490, 494
"To fall within the category of interpretive,
15
meaning compels or logically justifies the proposition.
The
16
substance of the derived proposition must flow fairly from the
17
18
substance of the existing document."
19
marks omitted).
20
“vague or vacuous terms--such as ‘fair and equitable,’ ‘just and
21
reasonable,’ ‘in the public interest,’ and the like--the process
22
of announcing propositions that specify applications of those
23
Id. (internal quotation
If the relevant statute or regulation consists of
terms is not ordinarily one of interpretation, because those terms
24
in themselves do not supply substance from which the propositions
25
26
can be derived.”
Id. at 494-95.
27
Substantive rules, sometimes referred to as legislative
28
rules, “create rights, impose obligations, or effect a change in
34
1
existing law pursuant to authority delegated by Congress.”
2
Erringer, 371 F.3d at 630.
3
substantive rules have the “force of law,” while interpretive
4
rules do not, and has adopted a three-part test for determining
5
whether a rule has the “force of law”:
6
The Ninth Circuit explains that
(1)
when, in the absence of the rule, there would not
be an adequate legislative basis for enforcement
action;
(2)
when the agency has explicitly invoked its
general legislative authority; or
(3)
when the rule effectively amends a prior
legislative rule.
7
8
9
United States District Court
For the Northern District of California
10
11
12
Erringer, 371 F.3d at 630 (citing Hemp Indust., 333 F.3d at 1087).
13
Plaintiffs argue that the FHFA's directives against PACE
14
programs with a first lien feature constitute a substantive rule
15
because (1) they announced a "flat ban" against such encumbrances
16
and thus amounted to general-lawmaking; (2) they had the force of
17
18
law and created a basis for enforcement; (3) they were issued
19
pursuant to statutory authority; and (4) they changed a prior
20
policy.
21
22
23
Plaintiffs rely on Catholic Health Initiatives, 617 F.3d at
490.
There, a non-profit charitable corporation and its
affiliated non-profit hospitals challenged a rule describing
24
“reasonable costs” related to the care of Medicare beneficiaries.
25
26
In general, malpractice, workers’ compensation and other liability
27
insurance premiums are considered by the Department of Health and
28
Human Services (HHS) to be part of a hospital's “reasonable costs”
35
1
incurred in providing services to Medicare beneficiaries and, as
2
such, are reimbursable.
3
issued a Provider Reimbursement Manual containing guidelines and
4
policies to implement Medicare regulations setting forth
5
principles for determining the reasonable cost of provider
6
services.
Id. at 491.
The Secretary of HHS had
A provision in the manual disallowed reimbursements for
7
insurance premiums paid to certain off-shore insurance
8
9
corporations, known as “captives,” often established by health
United States District Court
For the Northern District of California
10
care providers, where the corporations’ investments failed to
11
comply with certain requirements, such as a ten percent limit on
12
equity investments and other restrictions.
13
without deciding that the manual's investment limitations were an
14
"extension" of and consistent with the reasonable cost provisions
Id. at 492.
Assuming
15
of the Medicare Act and its regulations, the court concluded that
16
the limitations did not represent an interpretation of the statute
17
18
or its regulations.
19
have been “a closer case if the Secretary's Manual had indicated
20
that premiums paid to financially unstable captive offshore (or
21
domestic) insurance companies do not represent ‘reasonable costs.’
22
But [the provision] embodies a ‘flat’ rule, and the ‘flatter’ a
23
Id. at 496.
The court noted that it might
rule is, the harder it is to conceive of it as merely spelling out
24
what is in some sense latent in the statute or regulation.”
Id.
25
26
27
at 496 n.6.
The manual’s investment requirements were "simply too
attenuated" from the reasonable cost provisions of the Medicare
28
36
1
Act to represent an interpretation of the statutory terms.
2
496.
3
Id. at
The "safe and sound" operation of the Enterprises’ business
4
is likewise a vague phrase.
5
substance to the duties of the regulated entities to conduct their
6
The FHFA's July 2010 statement gives
operations in a “safe and sound” manner because the statutory
7
language alone does not compel a rule barring the purchase of all
8
9
mortgages with PACE first liens.
The FHFA's statement that PACE
United States District Court
For the Northern District of California
10
first liens "present significant safety and soundness concerns,"
11
such that mortgages encumbered by them are not suitable for
12
purchase, is a categorical ban.
13
that it is a bright-line standard.
14
The rule is flat in the sense
Without the FHFA's July 2010 pronouncement it is unlikely
15
that the agency would have a basis for an enforcement action
16
against the regulated entities because the safety and soundness
17
18
19
duty is vague and non-specific.
This case is distinguishable from Erringer, where the Ninth
20
Circuit held that the Medicare Act contained a standard of
21
approval for Medicare beneficiaries' claims and that HHS
22
guidelines issued to claims-processing contractors were
23
interpretive.
In Erringer, a class of Medicare beneficiaries
24
challenged rules issued by the Secretary of HHS giving criteria to
25
26
contractors in creating Local Coverage Determinations (LCDs).
The
27
Secretary issued National Coverage Determinations (NCDs),
28
excluding certain items and services from Medicare coverage that
37
1
were not "reasonable and necessary" under the Secretary’s
2
interpretation.
3
processing claims.
4
create and use LCDs to determine what claims were covered under
5
Medicare, and at what amounts, when no NCD applied to a claim.
6
The contractors generally relied on the NCDs in
However, the contractors were required to
The beneficiaries argued that the Secretary's criteria governing
7
the creation of LCDs should be subject to the APA's notice and
8
9
comment requirement.
The Ninth Circuit reasoned that the
United States District Court
For the Northern District of California
10
guidelines were interpretive because, even without them, the
11
contractors would have an over-arching duty to provide Medicare
12
coverage that was reasonable and necessary.
13
The holding that the Secretary's general guidelines for the
14
creation of the LCDs were interpretative does not establish that
15
the specific directives made by the FHFA here were interpretive.
16
As noted earlier, the requirement that the regulated entities
17
18
operate in a safe and sound manner is a non-specific mandate; it
19
is a less precise requirement than Medicare contractors’ statutory
20
duty to provide coverage for treatments that are reasonable and
21
necessary to cure disease and alleviate illness.
22
diagnosis or condition is bound to compel certain reasonable and
23
A given medical
necessary treatment as determined by medical professionals.
In
24
comparison to the guidelines for approving Medicare claims, the
25
26
27
FHFA’s directives barring the purchase of mortgages encumbered by
PACE first liens is not compelled by the statutory mandate that
28
38
1
the FHFA ensure that the regulated entities operate in a safe and
2
sound manner.
3
Furthermore, as the Court previously noted in connection with
4
its conclusion that the FHFA acted as a regulator, here the FHFA's
5
handling of its rule-making pertaining to private transfer fee
6
covenants supports a finding that the FHFA's PACE directives
7
amounted to substantive rule-making.
The FHFA utilized the notice
8
9
and comment process with respect to its proposed rule restricting
United States District Court
For the Northern District of California
10
the regulated entities from purchasing mortgages on properties
11
encumbered by private transfer fee covenants because such
12
covenants were deemed to undermine the safety and soundness of
13
their investments.
14
analogous instance, the FHFA deemed it appropriate to comply with
75 Fed. Reg. 49932 (Aug. 16, 2010).
In that
15
the APA notice and comment requirements.
16
The FHFA's directives on PACE obligations amount to
17
18
substantive rule-making, not an interpretation of rules that would
19
be exempt from the notice and comment requirement.
20
comment process must be followed.
The notice and
21
C. Arbitrary and capricious action
22
In addition to their procedural notice and comment claim
23
under the APA, Plaintiffs allege a substantive claim that the
24
FHFA's directives are arbitrary and capricious.
Under § 706(2)(A)
25
26
of the Act, “an agency action may be found unlawful by a reviewing
27
court and set aside, if it is found to be arbitrary, capricious,
28
an abuse of discretion or otherwise not in accordance with law.”
39
1
5 U.S.C. § 706(2)(A).
2
rules that the FHFA violated the APA by failing to carry out the
3
notice and comment process, as the Court has done above, it need
4
not reach their claim that the directives were arbitrary and
5
capricious.
6
Plaintiffs have stated that, if the Court
See Sprint Corp. v. FCC, 315 F.3d 369, 377 (D.C. Cir.
2003).
7
The Court notes that the FHFA has begun the notice and
8
9
comment process pursuant to the preliminary injunction that the
United States District Court
For the Northern District of California
10
Court granted earlier in this case.
On January 26, 2012, the FHFA
11
issued an Advance Notice of Proposed Rulemaking seeking comment on
12
whether the restriction set forth in the July 2010 statement and
13
the February 2011 letter should be maintained.
14
The FHFA received 33,000 comments in response to the notice.
77 Fed. Reg. 3958.
77
15
Fed. Reg. 36086.
On June 15, 2012, the FHFA issued a Notice of
16
Proposed Rulemaking and Proposed Rule concerning underwriting
17
18
standards for Fannie Mae and Freddie Mac related to PACE programs.
19
Id.
20
Docket No. 193.
21
regulation within a reasonable time.
22
suggestion, the Court declines to rule on the arbitrariness of the
23
The ninety-day comment period ends on September 13, 2012.
In turn, the FHFA is required to issue a
Thus, on Plaintiffs’
FHFA’s directives.
24
III. NEPA Claims
25
26
As with their claim of arbitrariness under the APA,
27
Plaintiffs assert that the Court need not resolve the merits of
28
their NEPA claim if the Court holds that the FHFA was required to
40
1
pursue the notice and comment process prior to issuing its
2
directives as to the PACE loans.
3
ongoing notice and comment process continue, the Court declines to
4
resolve the NEPA claim in this case.
5
Given the Court’s order that the
CONCLUSION
6
Plaintiffs’ motion for summary judgment is granted with
7
respect to their notice and comment claim under the APA, and
8
9
Defendants’ cross-motion for summary judgment on the claim is
United States District Court
For the Northern District of California
10
denied.
11
unnecessary to rule on the remaining claims under the APA and the
12
NEPA.
13
14
For the reasons explained above, the Court finds it
Accordingly, the FHFA shall complete the notice and comment
process and publish a final rule to consummate that process.
The
15
parties shall attempt to agree to an appropriate deadline for
16
publication of the final rule and notify the Court of that date,
17
18
or, if the parties cannot agree, Plaintiffs shall submit an
19
administrative motion, pursuant to the Northern District of
20
California’s Local Rule 7-11, for the Court to impose a deadline.
21
Defendants shall respond in accordance with the Local Rule.
22
Court retains jurisdiction of this action as necessary to ensure
23
The
compliance with this order.
24
IT IS SO ORDERED.
25
26
Dated: 8/9/2012
CLAUDIA WILKEN
United States District Judge
27
28
41
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